Asia's big two traders at odds

Japanese mobile phones are on China's new list of 100 percent tariff items

By Staff reporters

(CNN) -- China and Japan have one of the world's most important trade relationships.

China is the No. 2 destination for Japanese exports after the United States, while Japan is the No. 1 destination for Chinese goods.

By dollar value, China-Japan trade ties are overshadowed by the huge bilateral relationships that the U.S. has with its key trader partners Canada and Mexico, worth about $400 billion and $250 billion a year respectively.

But the $70 billion in goods and services that flows between China and Japan each year is a key driver of regional growth.

Chinese imports from Japan in 2000 grew 28 percent on the year before, while its exports to Japan were up 36 percent.

The dispute now threatening the China-Japan trade relationship is not large in dollar terms (about $150 million) but has the potential to expand into something more serious.

It has been building for some months and reflects the often prickly ties between the two countries.

China's imposition of higher tariffs on Japanese cars, air conditioners and mobile phones on Friday is a response to Japan's earlier actions to restrict some Chinese goods.

Japan's restrictions

China has been seeking to join the World Trade Organization for years

In April it put import restrictions on Chinese spring onions, shiitake mushrooms and the grass used to make tatami mats.

The dispute comes just before World Trade Organization officials meet in Geneva on June 28 to finalize China's long-standing bid to become a member of the global free trade body.

WTO rules forbid countries from retaliating against import curbs.

A Chinese spokeswoman said earlier this week that China was responding to "unjust" trade limitations that had "seriously harmed" Chinese industry, according to the People's Daily.

Talks between Japanese and Chinese officials broke up unsuccessfully in Beijing on June 4. The countries continued to meet during a gathering of Asia-Pacific trade ministers in Shanghai.

Chinese car dealers have already said it is impossible to get licenses to import Japanese cars. Japanese models account for a quarter of the overseas vehicles sold there.

Powerful farm lobby

The dispute promises to be thorny. Japan has a powerful and heavily subsidized farming lobby. Its farmers want protection from cheap goods coming in from China.

China has a history of retaliating against efforts to curb the sale of its products abroad by hitting at its trade partners' most popular products.

It waged a lengthy trade battle with South Korea, after South Korea raised import taxes on Chinese garlic. China responded by banning Korean mobile phones and petrochemicals, which caused the Korean government to relent.